Lesson for Union Dinosaurs: Detroit Bankruptcy Judge Rules Public Pensions Haircuts OK; Unions Whine City Got "Absolutely Everything"

At long last, beleaguered taxpayers will not have to put up with nonsense from public unions about the sanctity of pensions.

In spite of Michigan constitutional provisions, the federal judge presiding over the Detroit bankruptcy filing ruled the city filed in good faith. More importantly, the judge ruled the provision in the Michigan Constitution protecting public pensions isn't a bulletproof shield in a bankruptcy.

Yahoo!Finance reports Judge says Detroit Eligible for Bankruptcy

Detroit is eligible to shed billions in debt in the largest public bankruptcy in U.S. history, a judge said Tuesday in a long-awaited decision that now shifts the case toward how the city will accomplish that task.

Judge Steven Rhodes turned down objections from unions, pension funds and retirees, which, like other creditors, could lose under any plan to solve $18 billion in long-term liabilities.

"This once proud and prosperous city can't pay its debts. It's insolvent. It's eligible for bankruptcy," Rhodes said in announcing his decision. "At the same time, it also has an opportunity for a fresh start."

Rhodes' decision is a critical milestone. He said pensions, like any contract, can be cut, adding that a provision in the Michigan Constitution protecting public pensions isn't a bulletproof shield in a bankruptcy.

The city says pension funds are short by $3.5 billion. Anxious retirees drawing less than $20,000 a year have appeared in court and put an anguished face on the case. Despite his finding, Rhodes cautioned everyone that he won't automatically approve pension cuts that could be part of Detroit's eventual plan to get out of bankruptcy.

Emergency manager Kevyn Orr, who had testified the city's current conditions are "unacceptable," release a statement praising the judge's ruling and pledging to "press ahead with the ongoing revitalization of Detroit."

Behind closed doors, mediators, led by another judge, have been meeting with Orr's team and creditors for weeks to explore possible settlements.

Huge "Fresh Start" Win for Detroit

This was a huge, fresh-start win for the city of Detroit and its residents. The unions disagree.

Minutes after the ruling, a lawyer for the city's largest union, said she would pursue an appeal at the 6th U.S. Circuit Court of Appeals in Cincinnati. City officials got "absolutely everything" in Rhodes' decision, she told reporters.

"It's a huge loss for the city of Detroit," said Sharon Levine, an attorney for the American Federation of State, County and Municipal Employees, which represents half the city's workers.

Opponents want to go directly to a federal appeals court in Cincinnati, bypassing the usual procedure of having a U.S. District Court judge hear the case.

Definition of "Absolutely Everything"

Levine whines, city officials got "absolutely everything". No, not yet, but taxpayers can hope.

I propose the final settlement should include ...

1. An agreement to end collective bargaining for all city workers
2. An end to defined benefit pension plans for new workers and also for workers with less than 10 years of service
3. A sustainable benefit model for existing workers with over 10 years of service, with pension plan assumptions equal to the long-term treasury rate
4. Automatic provisions for  further pension cuts if plan assumptions were not met
5. An end to the right to strike for public safety workers
6. An end to all prevailing wage laws

That would be "nearly everything", and it would provide the fresh start that Detroit desperately needs.

Lesson for Union Dinosaurs

Something along those lines would also send a signal to unions everywhere that they can and should expect the same treatment in bankruptcy court.

Hopefully this would get unions to the bargaining table before bankruptcy, but don't count on dinosaurs to learn much from history.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com